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Grasim Industries
Realisation dawns
Event
Results in line with estimates: Grasim reported 2Q12 earnings in line with
our estimates, driven largely by stronger volume in VSF and higher costs in
the cement business. However, both VSF and cement prices came under
severe pressure on a QoQ basis and hence the sharply lower profitability.
We expect a recovery in the second half for the company and maintain
Outperform.
Impact
Strong 2Q consolidated results: Net Sales at Rs56.5bn grew 27% YoY, as
prices for both VSF and cement were higher YoY despite a significant QoQ
decline. EBITDA at Rs9bn was up 25% YoY as cost increase reduced
profitability marginally. Net profit at Rs4.3bn increased by 32% driven by a
50%+ increase in other income.
VSF business – volumes help offset cost pressure: VSF business
reported EBITDA at Rs3.0bn, up 13% YoY. Realisations improved by 7% YoY
but costs increased by 13.5%. However, volumes improved by 16% due to
better water availability, helping post growth in earnings. VSF prices have
weakened QoQ by 18% due to a sharp fall in cotton prices. Our team expects
cotton prices to remain range-bound, with poor production in the US and
Pakistan being offset by lower global demand.
Cement – lower profits due to seasonal weakness: Cement business
earnings saw a slowdown during the quarter due to lower prices and volume.
EBITDA margin in 2Q came in at Rs635/t, against Rs1205/t in 1Q. However,
cement prices have recovered by Rs400-500/t in Oct and this should help
recover lost ground. The demand-supply situation remains poor and the
performance of this segment will likely be driven by supply discipline.
Focus on growth remains: Grasim is expanding its annual cement capacity
by 9.2mt (20%), which is expected to be online by 1Q FY14. It is also well on
course for a 50% capacity expansion in VSF by end of FY13. This should
ensure that Grasim remains ahead of the industry growth rate.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs2,506.00 based on a DCF methodology.
Catalyst: Rally in VSF prices, recovery in cement prices.
Action and recommendation
Maintain Outperform: Grasim appears to be the only hedged play among the
large cement companies and our only Outperform among large cap cement
names. We recommend accumulating on dips.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries
Realisation dawns
Event
Results in line with estimates: Grasim reported 2Q12 earnings in line with
our estimates, driven largely by stronger volume in VSF and higher costs in
the cement business. However, both VSF and cement prices came under
severe pressure on a QoQ basis and hence the sharply lower profitability.
We expect a recovery in the second half for the company and maintain
Outperform.
Impact
Strong 2Q consolidated results: Net Sales at Rs56.5bn grew 27% YoY, as
prices for both VSF and cement were higher YoY despite a significant QoQ
decline. EBITDA at Rs9bn was up 25% YoY as cost increase reduced
profitability marginally. Net profit at Rs4.3bn increased by 32% driven by a
50%+ increase in other income.
VSF business – volumes help offset cost pressure: VSF business
reported EBITDA at Rs3.0bn, up 13% YoY. Realisations improved by 7% YoY
but costs increased by 13.5%. However, volumes improved by 16% due to
better water availability, helping post growth in earnings. VSF prices have
weakened QoQ by 18% due to a sharp fall in cotton prices. Our team expects
cotton prices to remain range-bound, with poor production in the US and
Pakistan being offset by lower global demand.
Cement – lower profits due to seasonal weakness: Cement business
earnings saw a slowdown during the quarter due to lower prices and volume.
EBITDA margin in 2Q came in at Rs635/t, against Rs1205/t in 1Q. However,
cement prices have recovered by Rs400-500/t in Oct and this should help
recover lost ground. The demand-supply situation remains poor and the
performance of this segment will likely be driven by supply discipline.
Focus on growth remains: Grasim is expanding its annual cement capacity
by 9.2mt (20%), which is expected to be online by 1Q FY14. It is also well on
course for a 50% capacity expansion in VSF by end of FY13. This should
ensure that Grasim remains ahead of the industry growth rate.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs2,506.00 based on a DCF methodology.
Catalyst: Rally in VSF prices, recovery in cement prices.
Action and recommendation
Maintain Outperform: Grasim appears to be the only hedged play among the
large cement companies and our only Outperform among large cap cement
names. We recommend accumulating on dips.
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